Abstract

This paper evaluates the dynamic causal relationship between financial development, savings, investment and economic growth in Botswana from 1976-2014 by employing a multivariate causality model. Results reveal that it is chiefly investment that drives the bank-related and stock exchange-based financial sectors in the short run. Stock exchange-based financial development drives bank-related financial development and savings in both the short run and the long run. While, savings are found to Granger-cause investment. Economic growth Granger-causes investment and savings, both, in the short run and long run. Further, only bank-related financial development is found to Granger-cause economic growth in Botswana.

INTRODUCTION

There is an ongoing argument among scholars concerning the direction of causality between bank-related and stock exchange-based financial development and savings, investment and economic growth. As far as economic growth causality studies are concerned, a considerable number of empirical works have been conducted on a number of countries though with conflicting results (see Nyasha and Odhiambo, 2015; Rehman et al., 2015; Acaravci et al., 2009). There are four views that have been empirically proven to exist in literature, that is, the supply-leading hypothesis, demand-following hypothesis, bidirectional-causality view and the fourth view stipulating that financial development and economic growth have no causal relationship (Nyasha and Odhiambo, 2015). The supply leading hypothesis claims that financial development stimulates economic growth (see Bayar et al. 2014; Masoud, 2013; Nazir et al., 2010; Tachiwou, 2010; Nowbusting and Odit, 2009; Caporale et al., 2004; Boubakari and Jin, 2010), and the demand following hypothesis claims that growth instigates the demand for financial commodities (see Odo et al., 2016; Isu and Okpara, 2013; Carby et al., 2012; Paramati and Gupta, 2011; Baliamoune-Lutz, 2003; Onwumere et al., 2012). The bi-directional causality hypothesis stipulates that financial progression and economic growth are bi-directionally causal while the fourth view states that financial progression has no relationship with economic growth (see Nyasha and Odhiambo, 2015; Acaravci et al., 2009).

However, causality studies that focused on the additional variables used in this study have not been as numerous and as widely researched on as the finance-growth nexus. The relationship between financial development and investment is articulated as having four main conclusions by Muyambiri and Odhiambo (2017), that is:

Conversely, most of the studies conducted to evaluate the causal relationship between either of the variables employed in this study, made use of mostly bank-related financial development indicators while ignoring the stock exchange-based side of the financial sector. In addition to the contradictory results that came from such studies, there has been no study to be best of our current knowledge that has sought to investigate the multivariate causal relationship between bank-related financial development, stock exchange-based financial development, savings and investment in one study especially for a country like Botswana1. Given these existing gaps, this study takes advantage of the multivariate causality analysis framework using the autoregressive distributed lag bounds testing approach to assess such a relationship.

METHODOLOGY

Shadowing Nyasha and Odhiambo (2015), the estimated ARDL model is given as follows.

\(\text{BFA}\) = accelerator-augmented index of bank-related financial development index, calculated as the means-removed average (of M3 to GDP, domestic credit to private sector to GDP ratio, and total domestic credit to GDP ratio) multiplied by the growth rate of GDP per capita.

\(\text{MFA}\) = accelerator-augmented index of stock exchange-based financial development index, calculated as the means-removed average (of stocks traded, total value to GDP ratio, market capitalisation to GDP ratio, and the turnover ratio) multiplied by the growth rate of GDP per capita.

EMPRICAL RESULTS

Stationarity tests are employed to ensure that all variables are integrated of maximum order 1. Otherwise, the ARDL bounds test methodology will break down if there are variables integrated of an order greater than 1. The Perron (1997) PPURoot unit root and the Augmented Dickey-Fuller Generalised Least Square tests unit root tests were employed to check the order of integration. The results for the test of stationarity of the variables are presented in Table 1.

The results from the bounds cointegration test indicate that three out of the five equations have a long run relationship. Consequently, the multivariate Granger causality test is run and the results are reported in Table 3. The equations with a cointegrated relationship are estimated, as expected, with the inclusion of an error correction term. Otherwise, no error correction term is included.

The empirical results of the multivariate Granger causality test are reported in Table 3.

The results in Table 3 reveal that they are only unidirectional causal relationships amongst a number of the variables under discussion. Economic growth is found to Granger-cause investment and savings both in the short-run and long run. Only bank-related financial development is found to Granger-cause economic growth in Botswana in the short run.

Inherently, investment, according to the results, precedes financial development. However, there is only a short-run unidirectional causal relationship from investment to stock exchange-based financial development. The same unidirectional relationship in both the short run and the long run is found from investment to bank-related financial development. Therefore, consistent with Odhiambo (2010), the results show that it is chiefly investment that drives the bank-related and stock exchange-based financial sectors. To induce financial sector development, there is need to put in place policies that encourage increased investment. Nevertheless, investment is found to be Granger-caused by economic growth and savings in both the long run and the short run in Botswana.

Notwithstanding that stock exchange-based financial development is Granger-caused by only investment, it precedes both bank-related financial development and savings in both the short run and the long run.

As already noted, investment and stock exchange-based financial development Granger-cause bank-related financial development in the short run and long run. The only variable that is Granger-caused by bank-related financial development is economic growth and this is only in the short run. This finding tends to confirm the findings of Bayar et al., 2014; Masoud, 2013; Nazir et al., 2010; Tachiwou, 2010; Nowbusting and Odit, 2009; Caporale et al., 2004; and Boubakari and Jin, 2010.

Savings Granger-cause investment in both the long run and the short run. Stock exchange-based financial development and economic growth Granger-cause savings in both the short run and the long run.

CONCLUSION

In this paper, the causal relationship between financial development, split into bank-related and stock exchange-based financial development, savings, and investment and economic growth has been empirically examined for the period of 1976 to 2014 for Botswana with the aid of a multivariate Granger-causality model. The study results show that it is chiefly investment that drives the bank-related and stock exchange-based financial sectors in the short run. However, the same deduction is true for bank-related financial development in the long run. Inherently, results also show that stock exchange-based financial development drives bank-related financial development and savings in both the short run and the long run. While, savings are found to Granger-cause investment. Economic growth is found to Granger-cause investment and savings both in the short-run and long run. Only bank-related financial development is found to Granger-cause economic growth in Botswana.

Therefore, to induce financial sector development in the short run, there is need to put in place policies that encourage increased investment. These must focus on the economic growth and savings that have been found to precede investment as per the results of this study.

See Muyambiri and Odhiambo (2015) for a fuller examination of the sequential development of the finance sector in Botswana↩

Boubakari, A. and Jin, D. (2010). The role of Stock Market Development in Economic Growth: Evidence from some Euronext Countries, International Journal of Financial Research, 1(1), 14-20. https://doi.org/10.5430/ijfr.v1n1p14

Carby, Y., Craigwell, R., Wright, A. and Wood, A. (2012). Finance and growth causality: A test of the Patrick's stage-of-development hypothesis. International Journal of Business and Social Science, 3(21), 129-139.

Isu, H. O. and Okpara, G. C. (2013). Does Financial Deepening Follow Supply Leading on Demand Following Hypothesis? A look at the Nigerian Evidence. Asian Journal of Science and Technology, 5(1), 10-15.

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution,
and reproduction in any medium, provided the original work is properly cited.

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